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Critical Issues for Key Public
Pension Stakeholders
PENSION TASK FORCE
Phoenix, AZ
October 3, 2014
Diane Oakley
Executive Director
www.nirsonline.org
NIRS: Nonpartisan Research
Focused on Pension Facts
• Nonprofit, nonpartisan research
organization founded in 2007.
• Contribute to informed policy making by
fostering a deep understanding of the value
of retirement security to employees,
employers, economy.
• National research and education programs
available at www.nirsonline.org.
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Agenda
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Stakeholders
Economics of DB Pensions
Investing Pension Assets
Pensions and Workforce Management
Overview of Pension Reforms
Pensions in the Larger Economy
Q&A
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Public Pension Stakeholders
Purpose of providing retirement plan is to achieve
stakeholder objectives.
•Employers who seek to attract and retain qualified
workers needed to perform essential public services and
have orderly workforce turnover.
•Taxpayers who seek the provision of public services at a
cost that is fair and reasonably stable and predictable; also
seek to minimize dependence on public assistance..
•Employees who seek compensation that is competitive
and a retirement benefit that promoted retirement security.
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Important to Keep Focus
on Retirement Policy
• Retirement security benefits everyone.
• Employer-sponsored retirement benefit is a workforce
management tool, old-age poverty insurance, and
stabilizing factor in the economy.
• As a stable employer, government is well-suited to
sponsor pensions.
• Core elements of pension promote retirement security:
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–
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Mandatory participation
Employee-employer cost-sharing
Benefit adequacy
Pooled assets invested by professionals
Lifetime benefits
Source: NASRA, The State Landscape on Pensions, 2011
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Strong Support for Public Pensions
Because Employees Pay
To what extent do you agree/disagree that state/local employees
deserve benefits because they finance cost by contributing from every
paycheck?
Americans Believe Public Pension
Benefits Levels Just Right
The average retirement benefit for public workers is $2150/month. Some
may be more or less. Is that too high, low, about right?
Source: NIRS Pensions & Retirement Security 2013
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Police/Fire Deserve Pensions to
Compensate for Risk
To what extent do you agree/disagree that police/fire have agreed to take
jobs that involve risk and therefore deserve pensions that will afford a
secure retirement?
Source: NIRS Pensions & Retirement Security 2013
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What Do Americans Think
About Retirement? Anxious
How concerned are you about current economic conditions affecting
your ability to achieve a secure retirement?
Source: NIRS Pensions & Retirement Security 2013
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Americans Want Pensions for All
To what extent do you agree/disagree that all workers, not just those
employed by state/local governments, should have a pension?
DB More Economically Efficient
Longevity Risk Pooling
• Manage the chance of
running out of money in
retirement
• Avoid the “over-saving”
dilemma and do more with
less
• Only 6% of DC account
holders purchase annuities
as cost can be more than
twice that of DB income.
Source: Pension Trustee Advisors, 2011
DB More Economically Efficient
How $10,000
Invested Grows
over 30 Years
Maintenance of Portfolio Diversification
• Take advantage of enhanced investment returns
from an ongoing balanced portfolio
Superior Returns
• Achieve greater investment returns vs. individual
accounts
Source: Pension Trustee Advisors, 2011
DB Plan Can Deliver Same Benefit
at About Half the Cost of DC Plan
Cost of DB and DC Plan as % of Payroll
25%
20%
Lower Returns/Higher Fees
46%
Savings
Less Balanced Portfolio
15%
No Longevity Risk Pooling
DB Cost
10%
5%
0%
12.5%
22.9%
DB Plan
DC Plan
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Pension Benefit Design Study
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Source: Teacher Retirement System of Texas and Gabriel, Roeder, Smith & Company
Pensions Are Sustainable
Lessons from Well-Funded Pensions
Studied Six WellFunded Public
Pension Plans:
New York,
Delaware, Idaho,
Illinois Municipal,
North Carolina,
Texas
Lessons from Well-Funded Pensions
Annual Required Cost Contributions
Paying the full ARC each year maintains a well-funded
plan with stable contributions.
• Texas TRS: Constitution mandates payment.
• Idaho PRF: Statute mandates state government payment.
Distribution of ARC received by 86 plans, 2013 Public Fund Survey
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Lessons from Well-Funded Pensions
Normal Cost & Shared Cost with Employees
Paying the normal cost
rate leads to stability.
• Idaho: The employer rate
cannot fall below the NCR.
• Texas: Requires that the
employer contribution rate
cannot fall below a certain
level.
Employee and
Employer Pension
Contributions, 1982 to
2009
Employee contributions
to help share the plan
cost
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Other Lessons Learned…
 Benefit improvements that are
actuarially valued before
adoption and properly funded;
 COLAs granted responsibly;
 Anti-spiking measures that
ensure actuarial integrity,
transparency;
 Economic, actuarial
assumptions that can
reasonably be expected to be
achieved long term.
NIRS Public Pension Plan
Investment Primer
Outlines How
Public
Pensions
Invest …..
Overview of Public Pension
Investment Process
Determination
of Liabilities
Investment
Policy
Statement
(IPS)
• Goal is to generate enough returns, combined with
contributions, to pay promised benefits over long term
• Each plan has unique liabilities
• Board determines acceptable level of risk
• Investment consultants and staff update capital market
assumptions
• Actuaries model risks/returns for different asset mixes
• Board selects target asset allocation and sets
performance benchmarks for the fund and each portfolio
• Actuaries estimate fund returns based on asset mix
Investment
Management
• Staff and/or external money managers buy and sell
securities and monitor performance
Evaluation
• Investment managers report short-and long-term returns
• Board evaluates the returns and risk incurred
Diversification & Modern Portfolio
Theory
Expected
Return
• Diversifying investments reduces risk for a given expected return.
• Why? The values of stocks, bonds, real estate, commodities, and
other asset classes do not move together in tandem.
• An “efficient” portfolio delivers maximum expected return for a
given level of risk.
Portfoli
os with
highes
t
possibl
e
return
at
each
level of
risk
Portfolios
below line are
inefficient
Risk
(Std Dev of Returns)
Public
and
Private
Funds
Similar
in Risk
until
2006
Source: Federal Reserve Flow of Funds Accounts, 1985-2011
Change in Average Asset Allocation
among State Pension Plans
Source: Adapted from Wilshire Consulting 2012. Public Equity and Fixed Income subtotals are
authors’ calculations. “Other” category includes cash and alternative non-equity assets.
>5% Real Return over Past 20-30
Years Not Exceptional
Real Returns on a Hypothetical Pension Portfolio
58% Equity/42% Fixed Income
Rolling Periods, 1926-2010
Source: Adapted from Stubbs 2012, p. 19, Table 3.
Public Plans Are Reaching Their
Long-term Investment Return Goals
Source: Callan Associates; For Periods ending 6/30/14
DB Plans are Powerful Labor
Management Tool
• DB plans prevalent in the public sector,
make up 6.5% of total compensation.
• Roughly 30% of public employees not
covered by Social Security, making the
DB benefit all the more important.
• DB plans make up a smaller share of
total compensation earlier in
employees’ careers than later.
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Towers Watson: Attraction and
Retention; What Employees Value Most
•
In 2011, 63 percent of workers under 40 agreed their
retirement plan was an important factor in accepting
their job – jumping up from 28% in 2009%.
•
More than three-quarters of new hires at companies
sponsoring DB plans say the retirement program
gives them a compelling reason to stay on the job.
•
Among DB plan participants in 2011, 51% say the
company’s retirement program played a strong role
in their decision to join the company, up considerably
from 31% in 2009.
Source: Towers Watson, Attraction and Retention; What Employees Value Most
Importance of Retirement Plans to
Attract Workers Under Age 40
Source: Towers Watson, Attraction and Retention; What Employees Value Most
Importance of Retirement Plans to
Retain Workers Under Age 40
Source: Towers Watson, Attraction and Retention; What Employees Value Most
Most Important Factors in Attracting
Employees Younger Than 40 to a Company
Source: Towers Watson, Attraction and Retention; What Employees Value Most
Most Important Factors in Attracting
Employees in 40s to a Company
Source: Towers Watson, Attraction and Retention; What Employees Value Most
Most Important Factors in Attracting
Employees Age 50 and Older to a Company
Source: Towers Watson, Attraction and Retention; What Employees Value Most
DB Plans Increase Recruitment
and Retention
• Strong recruitment and retention effects
mean that DBs serve as an effective
Human Resource tool.
• This results in lower employee turnover:
– DB firms have lower turnover rates than
non-DB firms, ranging from 20 – 200%.
– DB coverage increases tenure by 4
years compared to no plan, by 1.3 years
compared to a DC plan.
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DB Plans Increase Productivity
• Recruitment and retention effects translate
into productivity gains due to DB plans:
– Research finds productivity gains linked
to DBs.
– Firms moving from DB to DC
experienced productivity losses relative
to firms that kept DBs.
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DB Plans Provide Workforce
Management - Efficient Retirement
• DB plans encourage “efficient retirement”:
– Employees withdraw from the labor
force as their productivity declines.
– DBs can—and are—designed to
facilitate appropriate and optimal
retirement decisions.
• Efficient retirement is crucial during
economic downturns; no “job lock” with
DBs.
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DB Role in the Public Sector
•
Public workers prefer DBs when given a choice:
– 4% of Ohio employees opt for DC plan.
– 68% of Washington employees choose the DB plan
over the default combined DB-DC plan.
– 75% of young teachers in West Virginia opted out of
their DC plan and back into the DB plan.
•
DBs may improve public sector productivity:
– More likely to value their work than private workers.
– Tend to invest more in their skills.
•
Moving to a DC design could affect recruitment,
retention, productivity among this workforce.
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ON THE RIGHT TRACK?
Public Sector Difference
• Commitment to stable employment relations and
internal labor markets.
• Greater ability to smooth out the effects of business
cycles on funding requirements.
• Public interest mission: DB pensions help provide high
quality public services in a cost effective manner, while
also providing retirement security.
• Public employers have more in common with the
largest private employers, who have maintained DBs.
States’ Fiscal Challenges
•
State revenues have declined:
– 2012 Q1, revenues 5.5% below pre-recession
levels.
– $425 billion cut from budgets 2007-2011.
– 2013 budget gap of $55 billion, closed.
•
Pension funding levels have declined:
– Wall Street losses affected all investors.
– 92% of Annual Required Contributions were made
between 2001-2010
– Funding levels fell from 85% in 2008 to 73% in
2013..
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Assets held in Public Pensions
Totaled $3.7 billion as of 2Q2014
Actuarial
value of
assets and
liabilities, and
funding level,
FY 01 to FY 13
Public Pension Reforms After
2008 Financial Crisis
• Vast majority have modified their existing
pension plans. Most common:
– increased Employee contributions;
– reduced DB benefits for new hires, including
higher retirement age
– Cost of Living Adjustment (COLA)
reductions for retirees and existing workers.
Aggressive Reforms In Virtually All States to
Ensure Sustainability of Public Pensions
Types of Changes Enacted
Reduced benefits for new hires
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Employee contribution increase
29
Reduced COLA for current members
16
Employer contribution increase
(statutory)
9
0
10
20
30
Number of States
40
50
Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state.
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After 2008 Financial Crisis:
All States Make Pension Reforms
• One state - Oklahoma, has shifted
to a DC-only plan since 2005.
• Four states - mandatory hybrid
arrangements with a DC
component, new hires only.
• Three states - Cash Balance Plans
for new hires
Annual Wealth Changes for New
Employee, Relative to Earnings
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Alternative Plan Designs
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Alternative Plan Designs
•
Employees face more risk under DC plans
– Longevity risk
– Investment risk
– Inflation risk
•
Cash balance plans are a “hybrid” of sorts
– Technically DB plans
– Pooled and professionally invested assets, like DB
– Notional (hypothetical) account, like DC but funding
is not required
•
Both accrue benefits as a fixed earnings share, higher
in earlier years than later, unlike traditional DB plans.
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KEY FACT
Pensions Keep Americans
Out of Poverty
4.7 million fewer
poor and “near
poor” households.
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In 2010 We Found: Income from DB
Pensions is Associated with …
Rates of poverty among
older households nine
times lower than
households without DB
pension.
1.22 million fewer
households receiving
means-tested public
assistance, saving
taxpayers $7.9 billion.
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KEY FACT
Pension Spending Fuels
State and Local Economies
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Pensionomics: What We Found
Expenditures from public and private
pension benefits supported…
• Over $940 billion in economic output
nationwide
• Over 6 million jobs that paid over $300
billion in income
• Over $550 billion in value added
nationally
• $130 billion in federal, state, and local tax
revenue
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Impact of Pension Payments to
Arizona Public Retirees
Expenditures by government retirees
provide steady economic stream to
Arizona and its communities. 2012
expenditures supported:
• 42,542 jobs that paid $1.9 billion in wages.
• $5.9 billion in total economic output. Each dollar in DB
benefits supported $1.77 in total economic activity.
• $793 million in federal, state, and local tax revenues.
• Each taxpayer dollar “invested” in plans supported
$5.93 in total economic activity in the state.
Source: NIRS, Pensionomics 2014
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Value of DB Pensions
Are Extremely
Cost-Efficient
Help Recruit & Retain
Quality Employees
Drive Public
Assistance Savings
Ensure SelfSufficiency
Pensions
Get
Retirement
Right
Over Regulation
Cause of Private DB
Plan Decline
Create Jobs,
Fuel the Economy
All Americans Want
Pensions
Questions?
www.nirsonline.org